A good Article on DERIVATIVES

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errol43

New Member
Silver Stacker
If you want to learn about how Derivatives are going to bring down ou financial world..Get on to the Ainslie Bullion Site, down the right hand side of the home page, you will see Greyerz, One of the most important charts you will ever read..

I only know how to download articles from u tube. Someone hers on SS might do the honors if they think it might be of interest to SS members.

Regards Errol 43

Edited for spelling error
 
Here ya go ;)

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https://www.ainsliebullion.com.au/g...rtant-charts-ever/tabid/78/a/156/default.aspx
 
can someone explain a derivative to me please. Its basically a bet isnt it? whats stopping all these from being cashed in etc, where is the quadrillion dollars gonna come from?
 
Fykus said:
whats stopping all these from being cashed in etc, where is the quadrillion dollars gonna come from?
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i think you just answered your own question. They can't be "cashed in" unless you pay in full for delivery, so that won't happen.
 
Late news on Derivatives..According to Max Keiser 1.3trillion $ worth of paper derivatives got washed away in downtown Wall St. during Sandy the Storm!

Don't worry thats only 1% of the derivatives pot!

Regards Errol 43
 
Lets take a more rational look at this.

Of the 1.1 quadrillion $ of derivatives, I will make an educated guess that 90% of them are cash settled (ie: cannot claim physical delivery). I make this claim based on 6 years of working for a trading desk in an investment bank (which did include trading commodity derivatives).

Also, consider that of the 1.1 Quadrillion $ of derivatives, for each long (future, option, swap etc...) there must be a short. So that brings the true outstanding longs down to 550 trillion.

Now, let assume that there is a fairly even distribution of derivatives that are in-the-money (the position has made money) and out-of-the-money (the position has lost money)... I base this on looking at the COMEX open interest by option strike prices. So out of the 550 trillion in outstanding longs, only 225 trillion are actually worth anything.

Further, a derivative has by definition a maturity date. And most of the outstanding derivatives will only pay out at maturity date (eg. Futures contract or a European option - the most common type of commodity derivative traded).. So of the 225 trillion of in-the-money long positions, only the ones maturing today will be liable to be settled today. Granted, looking at COMEX data, over 50% of the open interest is in the front month - lets assume that holds for OTC (therefore cash settled) derivatives too. So only 112.5 trillion of the outstanding longs are liable for settlement this month.

and since 90% are cash settled, that leaves a potential 11.25 trillion of physically deliverable, in-the-money longs that are eligible to claim delivery this month.. not such an outrageous sum any more. And I guarantee you (again, based on the turnover I did when on the commodities desk), most of those positions are held by broker/dealers... who have no interest in physical delivery.

Also as all derivatives are margined daily (generally with cash), all cash profits an losses on them have already been realized... (this is a post GFC development, where OTC derivs are now margined) so a blow-up is far more remote.
 
hyperinflation said:
Also as all derivatives are margined daily (generally with cash), all cash profits an losses on them have already been realized... (this is a post GFC development, where OTC derivs are now margined) so a blow-up is far more remote.
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^^^ This is the most significant point IMHO.
It sort of puts it all in perspective (reality).
 
Hyperinflation..What do you mean that $11.25 trillion is not an outrageous sum for a single month considering that the total GDP of the whole world is $16 trillion p.a.

Seeing that you were into trading Derivatives, Do you really believe that they are safe.?

From what I have read on the subject of Derivatives, even the so called experts don't fully understand them. I certainly don't but I am trying to learn.

Regards Errol 43
 
errol43 said:
Hyperinflation..What do you mean that $11.25 trillion is not an outrageous sum for a single month considering that the total GDP of the whole world is $16 trillion p.a.

Seeing that you were into trading Derivatives, Do you really believe that they are safe.?

From what I have read on the subject of Derivatives, even the so called experts don't fully understand them. I certainly don't but I am trying to learn.

Regards Errol 43
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I forgot to add:

of the $11.25 trillion FACE VALUE of the derivative contracts outstanding and deliverable any month, the actual profit/loss would be no more than 1% of that... so about $100 billion changes hands. Just any average day of stock market turnover.

Derivatives are much safer now that daily margining occurs - as the incremental profit/loss is realized each day. The actual face value of outstanding is a meaningless number...

The real number that matters is: how many $ are made or lost for each $ move in the spot price... and there are plenty of derivatives where the notional outstanding is $100 billion, but the $ profit/loss per $ spot move is only several thousand.

Having said that.. i think derivatives are best left to "professional" investors
 
In a way, it's like if you are in a room with 10 people and one person has $20 and the others don't have any.

One person can buy something off another for 20. Then that person can use the 20 to buy something off another. And so on.

If you add up the transactions, it is far more than $20 and yet there was only ever $20 actual cash.

The time component of money is not appreciated by most people.

Just looking at simple numbers is like looking at the world in 2D completely ignoring the 3rd dimension.
 
Are all financial products considered derivatives? Or is it a special type of financial product only?

For example, a gift voucher from a store is a financial product which can be traded, technically speaking.
 
hawkeye said:
Are all financial products considered derivatives? Or is it a special type of financial product only?
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Financial derivative = contract, the value of which is derived from the underlying asset.

hawkeye said:
For example, a gift voucher from a store is a financial product which can be traded, technically speaking.
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A gift voucher is a "cash equivalent". Thus is considered an asset which can be traded.
 
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